A few decades ago, retirees could reasonably hunker down in certificates of deposit and other safe investments and generate a livable income. But that formula has been turned on its head for today's retirees. With cash and bond yields as low as they are, as well as the fact that many retirees could be drawing on their portfolios for a few decades or more, sticking with the safe stuff just isn't going to cut it unless you have a very high level of wealth.

Therefore, it's probably not too surprising that several readers had previously sounded a similar critique about my conservative and moderate exchange-traded fund portfolios: They argued that the portfolios are not aggressive enough. For retired or soon-to-be-retired investors with a bigger appetite for capital appreciation--and who can also stomach the higher volatility and the potential for outright losses that come along with a higher dose of stocks--this aggressive model ETF portfolio is for you. It holds half of its assets in stocks and the rest in bonds and cash. It's appropriate for retirees and pre-retirees with time horizons (estimated life expectancy) of 20 or more years. Thus, capital appreciation is an equally important goal as is stability.

But first--why ETFs for retirees? For starters, ETFs usually have low costs and good tax efficiency, and now many brokerage firms are allowing commission-free trades to boot. There's also that small fact that the typical active fund hasn't outperformed its benchmark over time. But perhaps the key benefit of ETFs or index funds in retiree portfolios is the ability to set it and forget it. Using exchange-traded funds gives an you a high degree of control over asset allocation. As a result, it's easy to shift into more conservative investments over time, and you don't have to worry about factors such as manager changes.

In-Retirement Portfolio: Aggressive

Holding

Allocation %

Vanguard Mega Cap 300 Index MGC

27

Vanguard Mid Cap ETF

9

Vanguard Small Cap ETF

3

iShares MSCI EAFE Index

9

Vanguard Emerging Markets Stock ETF

2

iShares Barclays TIPS Bond

17

Vanguard Short-Term Bond ETF

9

SPDR DB Int'l Gov't Infl-Protected Bond

2

iShares Barclays MBS Bond

6

iShares iBoxx $ Inv Grade Corp Bond

12

Cash

4

Total

100

As with the other two portfolios, I've relied on Morningstar's Lifetime Allocation Indexes, which in turn rely on the research of Ibbotson Associates, a division of Morningstar, to flesh out the asset allocations. It's helpful to think of these allocations as a starting point: Users should feel free to tweak them based on their own situations, risk tolerances, and time horizons.

As with the other two portfolios, I've leaned heavily on the insights of Morningstar's ETF analysts for their best ideas for populating an ETF portfolio. That team produces Morningstar's ETFInvestor newsletter, which also includes two model portfolios--the Hands-Free Portfolio, a long-term strategic portfolio, and the Hands-On Portfolio, featuring a more tactical-allocation approach. Note that these portfolios include holdings from multiple providers such as Vanguard and iShares, but it's possible to get fairly close to these portfolios' asset allocations using ETFs from Vanguard or iShares only.

A Total-Return Approach
This aggressive ETF portfolio stakes roughly half of its assets in stocks and holds the rest in a combination of cash, Treasury Inflation-Protected Securities, and other bonds. Truly aggressive retirees and pre-retirees--such as those whose living expenses are fully covered with income from Social Security, a pension, or a business--might consider tipping even more into equities. While it contains a hefty stake in bonds, it's not designed solely or even primarily for current income. Rather, the goal is to deliver a combination of capital appreciation with a reasonable amount of stability and income. As with the other portfolios, the assumption is that investors will use a total-return approach and periodically shift some of their investment assets to cash to fund current living expenses. (For a discussion of income versus total return, and why the two approaches aren't all that different, check out this article.)

As with the previous two portfolios, this portfolio doesn't take the total bond market route in an effort to avoid a giant weighting in government bonds. Instead, it includes separate holdings dedicated to corporates (iShares iBoxx $ Investment Grade Corporate Bond ) and mortgage-backed bonds (iShares Barclays MBS Bond ). Together, these two funds replicate the securities in a total market bond index fund, except they exclude the government-bond exposure. (Those seeking a more streamlined, hands-off portfolio that's agnostic about the current market environment could also use a total bond market index fund like Vanguard Total Bond Market .)

On the U.S. equity side, I've again modeled the holdings on ETFInvestor's Hands-Free Portfolio and have included three distinct funds. One could obtain similar market exposure via a broad market index portfolio such as Vanguard Total Stock Market ETF , but our portfolio has a modest emphasis on mega-caps.

The Role of CashAs with the other portfolios, this one does include cash, but it's not here to fulfill investors' income needs; rather, it's here to improve the portfolio's overall risk/return characteristics. The amount of cash you hold will be highly dependent on your personal situation: your spending needs, whether you're receiving income from other sources, and the size of your overall portfolio.

The traditional rule of thumb is for retirees to keep two to five years' worth of living expenses in cash. But given ultralow yields on cash, retirees might also consider building a two-part short-term fund composed of true cash (money markets and certificates of deposit) as well as a high-quality short-term bond fund.

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